• When Businesses Compete Fiercely, Crossing Certain Boundaries May Give Rise to Tortious Interference Claims
  • September 19, 2006 | Authors: Michael S. Errera; Dean S. Rauchwerger
  • Law Firm: Clausen Miller PC - Chicago Office
  • “Everybody pulls for David, nobody roots for Goliath”
    —Wilt Chamberlain

    Competition is at the heart of our capitalist economic system rewarding businesses supplying the best goods and services at the best value.  Despite the high value we place on robust competition, boundaries do exist.  Conduct that may be perceived as just “in your face” competition, may give rise to serious liability under the tort of tortious interference with economic relations.  This article addresses the liability hooks and the tug-of-war between legitimate competition and inappropriate interference with contractual relationships.

    Historical Backdrop

    Tortious interference claims originated as far back as the Romans when claims could be brought for injuries to one’s household for loss of services.  In modern time, the tort can be traced to the pinnacle cases Lumley v. Gye, 118 Eng. Rep. 748 (1853), and Temperton v. Russell, 1 Q.B. 715 (1893).  In Lumley, an opera singer was induced to breach her contract to sing for a particular theater, ultimately giving rise to claims for contractual tortious interference.  Temperton went further, declaring that a similar action to tortious interference with contract would lie for tortious interference with business relations that were merely prospective.  Such torts, often unrecognized, continue to this day in a variety of contexts.

    Claim Elements

    A.Tortious Interference With Contract

    Although specific claim elements may vary by jurisdiction, generally, there are five elements:  1) the existence of a valid and enforceable contract; 2) the interfering party’s knowledge of the existence of the contract; 3) the interfering party’s intentional inducement of the contract’s breach; 4) absence of justification by the interfering party; and 5) damages arising from the interfering party’s action.

    B. Tortious Interference With Prospective Economic Relations

    Interference with prospective economic relations involves interference with a reasonable expectation of profit, or potential contractual relationships, ultimately resulting in the loss of a property right.  To establish a prima facie case, plaintiff generally must prove: 1) they had a reasonable expectation of entering into a valid business relationship with a third party; 2) the interfering party purposely interfered and defeated this legitimate expectancy; and 3) the interfering party’s actions caused harm to the plaintiff.

    Plaintiff must prove the interfering party’s conduct was not privileged, as there can be some insulation from liability for certain interference under the privilege of competition.  From a public policy standpoint, society encourages competition, and there is no fault in one business beating its rival to prospective customers.  This protection, however, is limited to bona fide competition.  It does not extend to situations where one party is not seeking to acquire the business diverted from another party, but rather to gratify ill will or further some unrelated interest.

    Defenses

    A. Tortious Interference With Contract

    Significant defenses exist:

    1. the interfering party’s actions were reasonable and fair under the circumstances.  A court will examine the following:

    a. nature of the conduct;

    b. motive;

    c. interests of plaintiff that were interfered;

    d. interests sought to be advanced by the interfering party;

    e. social interests in protecting the freedom of the action of the interfering party and the contractual interests of plaintiff;

    f. proximity or remoteness of the interfering party’s conduct to the interference (was the immediate result of claimed interference a breach of a contract or did the interference result in a slow decline in sales); and

    g. the relations between the parties (was there an actual contract between the parties that was interfered with, or was the contract still being negotiated or was it terminable at will).

    2. the interfering party held an interest in the contract at issue;

    3. a subsidiary had the right to retain control over the actions and agreements entered into by plaintiff;

    4. the agreement was not fully executed or is vague as to its terms - no -reasonable expectancy to gain from the agreement;

    5. no facts show the interfering party’s actions affected plaintiff’s relationship;

    6. no proximate cause link between the interfering party’s action and the loss of a business relationship;

    7. plaintiff has no proof of damages or loss suffered; and

    8. the action was justified.

    B. Tortious Interference With Prospective Economic Relations

    The motives of both the interfering party and the third party will be closely examined to determine whether the interfering party should be held liable since only intentional interference is actionable.  The motive of the third party in withdrawing the prospective advantage will also be important in determining the proximate cause of plaintiff’s loss.  The interfering party’s lack of justification for the interference is not an element of the tort, but rather serves as an affirmative defense.  Additionally, the interfering party will not be liable if:

    1. there was no “business” relationship between the plaintiff and a third party;

    2. the party with whom the plaintiff had a business relationship was not a third party (i.e., not independent of the interfering party);

    3. the plaintiff had no reasonable expectancy of economic gain from the business relationship with the third party;

    4.the interfering party did not engage in any conduct that interfered with the plaintiff’s business relationship with the third party;

    5. the interfering party had no intent to cause interference with the plaintiff’s business relationship with the third party;

    6. there was no proximate causal connection between the interfering party’s conduct and the impairment to or loss of the reasonable expectancy of economic gain from the plaintiff’s business relationship with the third party;

    7. the plaintiff suffered no damage or loss as a result of the interfering party’s interference with the plaintiff’s business relationship with the third party; and

    8. the interfering party’s conduct was privileged.

    Damages Considerations

    • compensatory: amount the contracting parties contemplated to result from the contract;
    • punitive: allowed in some jurisdictions if malice motive is proven; 
    • restitution: recovery of profit or gain acquired by the interfering party; and 
    • attorney fees: allowed in some jurisdictions if punitive damages awarded.

    Conclusion

    Competition does not, by itself, provide a legitimate justification to interfere with a competitor’s contracts or prospective economic relations.  When those boundaries are violated, legal claims may exist.  Given the many twists and turns on where the boundaries lie, counsel should be consulted.  Please contact the authors if you have any questions on this vital area of the law.